Hong Kong's proposed listing rules to draw mainland Chinese tech firms
Hong Kong’s introduction of a new channel for specialist technology companies to get listed on the mainboard will likely be a boon for the equity market as it is likely to draw mainland Chinese tech firms, but industry experts ask that the HKEX balances investor protection and fundraising opportunities carefully.
On October 19, Hong Kong chief executive John Lee gave his first policy address since taking office in July. He dedicated a section to enhancing Hong Kong as an international financial centre, which included revising mainboard listing rules to “facilitate fundraising of advanced technology enterprises that have yet to meet the profit and trading record requirements”.
Lee also said that the HKEX will “revitalise” the Growth Enterprise Market (GEM) – a scheme that has a lower listing eligibility criterion (compared with the mainboard) for small and medium enterprises.
On the same day, the Hong Kong stock exchange published a consultation paper that would open a new channel for specialist technology companies to list on the mainboard.
This included the division of specialist tech companies into commercial and pre-commercial firms, with higher requirements for pre-commercial companies due to their risk profile. For instance, the minimum expected market capitalisation at listing is proposed to be at HK$8 billion for commercial companies, and HK$15 billion for pre-commercial companies.
Industry experts generally told AsianInvestor that revising listing rules to facilitate the financing of advanced technology companies was necessary and they largely welcomed the move.
“The development can well be understood, given HKEX's growing strategic importance to China. While the HKEX aims to continue serving the global capital market at a potentially larger scale, it also has a strategic role to fill in light of China's further growth trajectory and the related need of securing a well-functioning secondary market in Hong Kong,” Cheung Chilok, portfolio manager and strategist for delegated investment solutions at Mercer told AsianInvestor.
“The proposed set of rules opens wider doors for listings of specialist technology companies, which are seen as important at times when strong political emphasis is put on technological security,” he said.
Mainland Chinese tech companies with primary listings in the US have been considering secondary listings in Hong Kong, or switching their primary US listing status to the SAR amid US-China tensions. But a fifth of US-listed Chinese firms do not currently qualify for a Hong Kong listing, according to a South China Morning Post report.
With the new listing rules, "companies whose ADRs [American Depositary Receipts] face potential delisting in the US undoubtedly will consider Hong Kong as a possible alternative,” Cheung said.
Asset owners’ investment opportunity set will be broadened if Hong Kong is successful in attracting “a meaningful amount of specialist technology companies,” he said.
He added: “This will add diversity to the investment universe of HK equities. That not only attracts capital flows and improves the liquidity of the market, it also broadens asset owners' investment opportunity set, which in turn enhances diversification.”
However, he also cautioned that “the favourable listing rules are merely one of the prerequisites to attract the specialist technology companies to list in Hong Kong. Reputation of regulators, legal system, liquidity and potential size of the capital market are also critical”.
“Furthermore, there are always company-specific reasons that drive the preferred location for listing, such as political risk and tax considerations,” he added.
Asset owners were hoping for policies that support sustainable economic growth and a stable financial market, which the policy addressed to a certain extent, he said.
However, other market players said they were hopeful for more easing of Covid restrictions, particularly the quarantine restrictions between Hong Kong and mainland China. The policy address also revealed several measures such as relaxed visa and hiring rules for non-residents, but the industry responded with a guarded welcome.
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“I’m not too sure if it’s attractive enough,” one senior director at a Hong Kong asset manager told AsianInvestor. “Historically it’s never been an issue to get a working visa in Hong Kong to be honest, so those are probably more soundbites [for publicity] than rooted in reality.”
INVESTOR PROTECTION VS CAPITAL RAISING
However, the senior director agreed that the listing rules change was a “positive for many pre-profit companies” but that “HKEX will need to strike a balance between investor protection versus facilitating capital raising. But overall this can improve the attractiveness of the HK equity market.”
Eddie Wong, capital markets services partner at PwC Hong Kong agreed. “Most of these companies have potential and are on the radar of many institutional investors," he said.
"The regulators should consider the unique characteristics of these companies and tailor a new listing regime that allows the listing of advanced technology companies who cannot otherwise meet the prevailing listing requirements without compromising shareholder protection,” he told AsianInvestor.
He also lauded the repositioning of the GEM scheme. “It will help SMEs and start-ups to increase financing channels,” he said. “In addition, we agree that Hong Kong should speed up the development of more RMB-denominated investment opportunities, so as to strengthen Hong Kong's advantage as the largest offshore RMB business centre and promote the internationalisation of RMB.”
FAMILY OFFICE TAX BREAKS
During the policy address, chief executive Lee also said that the government will introduce a bill this year to offer tax concessions to eligible family offices, with the aim of attracting 200 family offices to establish or expand operations in Hong Kong by 2025.
However, reactions were more mixed to this move.
Veteran asset management consultant Stewart Aldcoft told AsianInvestor that it was welcomed “as this is one area where a big effort is being made to win this type of business but most go to Singapore as the tax benefits in SG are better”.
“Further, mainland Chinese families are still more likely to go to set up in Singapore than Hong Kong because they now view Hong Kong as part of China thus if they want their assets beyond China's reach, Singapore is better,” he said.
The asset management firm’s senior director was a little less optimistic, and Mercer’s Cheung said more will need to be done to attract family offices.
“Tax already is low here, and what’s more important is the free flow of capital and legal consequences, than tax. Singapore tax is also low,” the asset manager said.
“It is worth noting that there is a great deal of variety amongst single family offices due to their own setup and source of wealth accumulation. It clearly takes more than just tax concessions to attract family offices to choose Hong Kong,” Cheung said.
Additional reporting by Shusi He.